Goodman Fielder dodges the crossfire

As the supermarket war rages on, food manufacturer Goodman Fielder has been caught in the crossfire. Via divestments and cost cutting, it is working hard to limit the collateral damage.

Goodman Fielder’s vast cost-cutting initiative serves as a striking example of the impact the supermarket price war has had on Australian producers.

Coles and Woolworths may offer great value and fresh produce to the cost-conscious consumer, but not everyone’s a winner in the ongoing price war. As the fight heats up, those suffering most are domestic suppliers, manufacturers and smaller retailers.

Included in this group is food manufacturer Goodman, which has shown that in the battle against increasing price pressures, brought on by the supermarket giants, the slow and steady approach could be a winner.

With brands including White Wings, Meadow Lea and Mighty Soft, Goodman has long been known as a leading food company that sells a range of products to both retailers and wholesalers. But higher costs and increased pricing pressures have hit the company hard in the past couple of years as the major supermarkets moved towards heavy discounting and began pushing their own brand goods.

Goodman has had to radically overhaul its strategy to cope with this fundamental shift. The food maker has undertaken a major review of operations that includes selling off its fats and oils division, Integro, as well as its NZ Milling business. One aspect that onlookers were waiting to see in today’s results was an update on the proposed sales.

Without naming the suitor, Goodman confirmed that it has entered into exclusive talks with a bidder for Integro and expects to close the deal by the end of the August. Until there’s an official announcement, investors will have to make do with speculating on the identity of the buyer.

Goodman Fielder’s largest shareholder, Singaporean palm oil firm Wilmar International, was for a time favoured to acquire Integro. In February, Wilmar increased its stake in Goodman to 10.1 per cent. While recent reports indicate that the Singaporean company may have lost interest in the bread and spreads maker, nothing has been confirmed as yet.

So with the proposed divestments ticking along, Goodman has been able to focus on its "Project Renaissance” – a restructuring initiative launched by the breads maker to dramatically reduce costs so as to capture $100 million in annual savings by 2015.

And it has made progress. New chief Chris Delaney has targeted overheads and has succeeded in finding $23 million in savings in 2012 alone. The breads and spreads maker has also kicked off the second phase of the project by working to improve manufacturing and supply chain efficiencies.

As part of its cost-saving initiative, the food maker has continued to cut staff and close facilities. It has just closed its Rockhampton bakery, and plans to close its Whiteside facility and Cairns bakery in the next 12 months. In another bid to keep costs down, the food maker has cut 100 items from its product range. The bread maker is set to continue on this path as it looks to come back to profit in the next few years.

This is what the price war looks like from the other side of the supermarket aisle. Sure, the benefit is that bread and milk can now be picked up for just $1, but these savings ultimately translate to pressure on suppliers and manufacturers that results in redundancies, store closures and reduced competition. In the past year alone, Goodman has seen its EBITDA margin fall from 13 per cent to 9 per cent as it continues its bid to compete with the major retailers. So while consumers choose more home brand goods to save a few pennies, Woolworths and Coles will carry on squeezing suppliers and manufacturers to improve their bottom line.

In the current retail environment, price pressures will remain as consumers try to get more bang for their buck. By working to overhaul its strategy to take into account these developments, Goodman looks to be finding its place in the new world order.